Liontrust UK Micro Cap Fund

June 2020 review

The Liontrust UK Micro Cap Fund returned -0.1%* in June. The FTSE Small Cap (excluding investment trusts) Index and the FTSE AIM All-Share Index comparator benchmark returned 3.4% and 1.0% respectively. The average return of funds in the IA UK Smaller Companies sector, also a comparator benchmark, was 0.3%.


The market’s rebound from its Covid-19 losses stretched into the early days of June as investors continued to look beyond the immediate impact of the pandemic towards an economic recovery. This optimism was dented mid-month by a sober assessment of the situation by the US Federal Reserve, which is forecasting a 6.5% contraction in the US economy this year and no scope for interest rate rises until the end of 2022 at the earliest. The IMF added to the economic gloom, downgrading its estimate for 2020 global economic growth from -3.0% to -4.9%.


Investor unease was further deepened by news of spikes in US Covid-19 infection rates and a new outbreak in China. Despite this, the FTSE All-Share was able to retain some of its early-month gains.


Companies have now been operating within the new social and economic parameters presented by Covid-19 for a few months. As such, their updates to the stockmarket – while still characterised by huge uncertainties over the short-term outlook – have been able to provide more detail on the nature of trading during the pandemic than those issued in previous weeks.


An AGM update from Science Group (+18.8%) stated that adjusted operating profit for the first half of 2020 was around 50% higher year-on-year; those client sectors that were impacted by Covid-19 were more than offset by demand in other areas such as the medical sector. Science Group provides R&D consultancy services to clients in sectors such as medical, food & beverage, industrials, chemicals and energy.


In April, digital identity, credential management and secure mobility specialist Intercede Group (+14.5%) stated that earnings for the year to 31 March were substantially higher than the market’s expectations at the time. Full-year results in June reveal this figure to be £1.0m, double the previous year’s level. With revenues only rising a modest 3%, the increased profitability was the result of cuts to operating expenses that have been introduced as part of the relatively new CEO’s business review. Intercede believes it is well placed to weather the Covid-19 pandemic, owing to a number of its products and services that allow individuals to securely work remotely.


Eckoh Group (+12.5%) also believes it has some insulation from the crisis, citing its high levels of recurring revenue and record order book. The company provides software solutions used in contact centres, including a patented solution that allows the secure receipt of customer payment information. In the year to 31 March it grew revenue 16% to £33.2m and has slightly more than this amount, £35.9m, in its order book of contracted business. Recurring revenue has increased to almost 80% of the total; this is one of the three core intangible Economic Advantage assets that we believe Eckoh possesses.


Crimson Tide (+25.5%) announced the signing of a contract worth more than £1.6m over five years, making it the company’s second largest contract. Crimson Tide will provide its mpro5 mobile app platform to an unnamed large retail chain to help it manage cleaning and maintenance requirements in real time. In a short AGM update later in the month it also stated that it is seeing little business impact from Covid-19; its clients including supermarkets, rail network and the NHS.


By contrast, the Covid-19 crisis has had a significant impact on Mind Gym (-11.1%), as shown by full-year results released in June. Revenues in the 10 months to the end of January had been running 22% ahead of the prior year’s levels, but disruption in February and March restricted full-year revenue growth to 15% (to £48.2m). It also had a big impact on margins: the adjusted profit before tax margin fell to 13.7% from 19.5% last year. With this negative effect carrying over to the new financial year, Mind Gym has acted to cut costs, taking its salary expenditure down by almost 20% through a combination of salary sacrifice, part-time working and furlough. It is also accelerating its investment in its virtual and digital training proposition to position itself for a remote-working world.


Full-year results from Tatton Asset Management (+17.7%) fleshed out performance for the year to 31 March that had already been outlined in an April trading update. As previously announced, discretionary assets under management rose 9.6% to £6.65bn after a £1.13bn inflow was offset by a negative investment performance of £681m as markets tumbled at the end of the accounting period. Paradigm, its IFA support services business, grew revenues by 10% while Paradigm Mortgages increased membership by 11% to 1,544 with gross lending increasing 18% to £9.9bn. Although lockdown measures have negatively impacted engagement of its existing and potential client IFAs, Tatton is confident in its financial position and its outlook; it has proposed a final dividend of 6.4p a share.


Investment manager and specialist financial adviser Frenkel Topping’s (+13.9%) AGM included a short update on trading, noting that it has traded positively in the first five months of 2020 with significant mandates won.


Company sales specialist K3 Capital Group (-14.0%) announced a £30.5m placing to finance the acquisition of randd, a specialist in securing research and development tax credits for clients. A £9.3m initial consideration is being met by the issue of new shares to the owners of randd, the majority of which are being immediately offered in the placing. A further amount of up to £7.5m may also be payable in future subject to earn-out criteria. Existing shares in K3 Capital Group traded down towards the new shares’ placing price of 150p. The fund raise was upsized due to strong investor demand, providing the company with additional firepower to target further M&A opportunities which may arise in the coming months.


Shares in Quartix Holdings (-16.4%) rallied in May ahead of a 2 June trading update before easing back for much of June. Vehicle mileage for its tracking systems in the UK and France troughed in late March at less than half the normal rate. French mileage had recovered to 9% below baseline levels by 22 May, but UK mileage remained 40% lower than normal. While Quartix is reluctant to give further guidance, it believes the pandemic is unlikely to have a material impact on profit or cash flow in the first half of 2020. It had a comfortable net cash position of £9.5m at the beginning of June, up from £8.5m at end-March, and had previously stated that it would not envisage having to dip into those cash reserves even under a reasonable worst-case scenario. Quartix’s subscriber base has yet to be significantly affected – rates of attrition have remained at around 12% per annum and it has only had to provide payment relief or deferral to 6% of its subscriber base by value. However, it believes the true impact on the subscriber base may not become apparent until the autumn, after the government’s financial support packages are withdrawn.


Positive contributors included:

Crimson Tide (+25.5%), Science Group (+18.8%), Tatton Asset Management (+17.7%), Vianet Group (+15.1%) and Intercede Group (+14.5%).


Negative contributors included:

Beeks Financial Cloud (-18.6%), Accesso Technology Group (-18.6%), Quartix Holdings (-16.4%), Oxford Metrics (-15.3%) and K3 Capital Group (-14.0%).


Discrete years' performance** (%), to previous quarter-end:







Liontrust UK Micro Cap I Acc





FTSE Small Cap ex ITs





FTSE AIM All Share





IA UK Smaller Companies











*Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested), bid-to-bid, institutional class. Non fund-related return data sourced from Bloomberg.


**Source: Financial Express, as at 30.06.20, total return (net of fees and income reinvested), bid-to-bid, institutional class. Discrete data is not available for five full 12 month periods due to the launch date of the portfolio. Investment decisions should not be based on short-term performance.


For a comprehensive list of common financial words and terms, see our glossary here.


Key Risks

Past performance is not a guide to future performance. Do remember that the value of an investment and the income generated from them can fall as well as rise and is not guaranteed, therefore, you may not get back the amount originally invested and potentially risk total loss of capital. Some of the Funds managed by the Economic Advantage team invest primarily in smaller companies and companies traded on the Alternative Investment Market.  These stocks may be less liquid and the price swings greater than those in, for example, larger companies. The performance of the GF UK Growth Fund may differ from the performance of the UK Growth Fund and will be lower than its corresponding Master Fund due to additional fees and expenses.


The information and opinions provided should not be construed as advice for investment in any product or security mentioned, an offer to buy or sell units/shares of Funds mentioned, or a solicitation to purchase securities in any company or investment product.  Always research your own investments and (if you are not a professional or a financial adviser) consult suitability with a regulated financial adviser before investing.

Friday, July 10, 2020, 3:20 PM